Impac Mortgage Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Impac Mortgage Holdings Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference call over to Justin Moisio, Vice President, Investor Relations. Please go ahead, sir.

[Justin Moisio:]

Thank you. Good morning, everyone. Thank you for joining Impac Mortgage Holdings third quarter 2016 earnings conference call. During this call, we will make projections or other forward-looking statements in regards to but not limited to, GAAP and taxable earnings, cash flows, interest rate risk and market risk exposure, mortgage production and general market conditions. I would like to refer you to the business risk factors in our most recently filed Form 10-K under the Securities and Exchange Act of 1934. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This presentation including outlook and any guidance is effective as of the date given, and we expressly disclaim any duty to update the information herein. I would like to get started by introducing Bill Ashmore, President of Impac Mortgage Holdings.

[Bill Ashmore:]

Thanks, Justin. Good morning and welcome to or joining Impac's third quarter 2016 earnings call. I have on the line with me, Joe Tomkinson, our Chairman and CEO; Todd Taylor, our Chief Financial Officer and Ron Morrison, our General Counsel. I will begin with a brief review of the results of the third quarter, 2016. Consistent with our previous earnings releases, management believes it is more useful to discuss adjusted operating income, which is operating income excluding changes in the contingent consideration to get a better understanding of the operating results. Therefore, in the third quarter, 2016, adjusted operating income increased to $47.4 million or $3.29 per diluted common share, as compared to $18.5 million or $1.33 per diluted common share in the second quarter, 2016. GAAP net earnings in the third quarter, 2016 were $16.5 million or $1.18 per diluted common share as compared to net earnings of $12.4 million or $0.92 per diluted common share in the second quarter, 2016. In the third quarter, 2016, origination volume increased 30% to $4.2 billion as compared to $3.2 billion in the second quarter, 2016. During the third quarter, retail originations through the CashCall Mortgage channel continued to be the main driver of total originations, representing approximately 78%, or $3.3 billion of the total originations. The brand recognition of CashCall Mortgage as a consumer direct best priced option, which closes loans on average in 15 days, has allowed our originations to surge in the first nine months of 2016. Gain on sale margins increased by 25 basis points to 268 basis points in the third quarter, 2016 as compared to 243 basis points in the second quarter, 2016. The continued low interest rate environment allowed us to increase volumes during the third quarter and grow our pipeline without having to reduce margins. As of September 30, 2016, the company's mortgage servicing portfolio increased to $9.4 billion, a 42% increase from June 30, 2016, which increased the value of our retained MSRs to $87.4 million at September 30, 2016, as compared to $54.7 million at June 30, 2016. This also resulted in a 35% increase in servicing income in the third quarter over the second quarter and delinquencies have remained very low. Current origination trends in the fourth quarter should result in continued strong growth in our servicing portfolio through year end. We anticipate it to be in excess of $12 billion at the end of the fourth quarter in mortgage servicing assets. In September 2016, the Company completed a successful over-subscribed follow-on offering including underwriter over-allotment issuing 3.45 million shares of common stock at a public offering price of $13 per share. The demand from the institutional investment community was strong and resulted in a 20% upsizing of the shares offered. Gross proceeds to the Company were approximately $44.9 million before deducting underwriter discounts and commissions and estimated expenses payable by the Company. The use of the proceeds from the offering is not only being used to retain servicing and originations and to grow market share and geographic scope within all origination channels, but also to expand our non-QM loan production. In addition, despite issuing new shares of stock during the quarter, the Company was able to increase book value by over $1 per share to $13.38. In recent quarters, the Company has strategically moved to hold higher amounts of MSRs on its balance sheet and focused on recapturing the runoff in the low interest rate environment. With a strong retention capability, we are able to both take advantage of the low interest rate environment with stronger origination volume and create a low weighted average coupon portfolio that will increase in value during a raising rate environment. As of September 30, our $9.4 billion high credit quality servicing portfolio had a weighted average coupon of 3.76%, a weighted average LTV of 66% and weighted average FICO of 742. Consistent with this strategy of growing a high quality MSR asset portfolio, we focused on recapturing runoff. During the third quarter, prepayments increased to $1.1 billion in UPB as compared to $894.5 million in the second quarter. However, during the third quarter, we successfully recaptured and refinanced 85% of these prepayments, an improvement over an 83% retention rate for the second quarter. As a result of the retention of servicing, we had a $15.9 million loss on mortgage servicing rights. These losses were due to prepayments from the recapture efforts in our portfolio and other sold portfolios. Upon a borrower refinancing a loan in our portfolio, the associated MSR of the initial loan is written off in the form of a mark-to-market loss from the prepayment of the loan. However, we also record the origination income from the refinanced loan and the gain on sale including the capitalized servicing value of the new MSR. In the third quarter of 2016, we recorded $8.2 million change in fair value of mortgage servicing rights, this was comprised of $9.3 million in MSR mark-to-market losses due to prepayments and was offset by a mark-to-market gain at September 30, 2016 of $1.1 million, as a result of slight increase in rates during September. During the third quarter, the Company was successful in negotiating an amendment to a previous MSR sale, extending the early prepayment protection, in return allowing the Company to solicit our customers for refinance. Upon refinancing a customer from the sold portfolio, we earn the origination income on the new loan and gain on sale including capitalized servicing value of the new MSR but also record a charge representing a premium recapture charges related to the early prepayment protection. In accordance with GAAP, a charge for the current period activity is recorded plus an estimate of an expected servicing premium to be paid to the investor is required to be recorded. In the third quarter of 2016, the loss on mortgage servicing rights of $7.5 million includes $2.8 million charge for the third quarter 2016 activity and a reserve of $4.2 million for future expected premium recapture charges. As long as the interest rate environment allows recapture opportunities, we expect to continue to refinance borrowers in the sold portfolio. However, we will monitor the profitability of this extended early payoff protection on a month-to-month basis. The amendment gives the Company the option to terminate the agreement with a 90-day notification. With regard to the overall loan originations, we have seen our locked pipeline remain strong into the middle of the fourth quarter. During the month of October, our origination volume was $1.4 billion. Additionally, at September 30, 2016, our locked pipeline was $1.2 billion and currently our locked pipeline is approximately $1 billion. Our growing MSR portfolio coupled with our successful retention program and the planned expansion of non-QM volumes and geographic diversity should position the Company well in both a declining and a rising interest rate environment. Before opening the call to questions, I'd like to remark that there is no doubt that Impac had a blockbuster quarter with over $100 million in total revenues, $47.4 million adjusted operating income and raising nearly $45 million of new equity capital, this was Impac's best quarterly financial performance since 2005. Therefore, I'd like to congratulate all the Impac employees for their stellar third quarter 2016 performance. Now, I'll close my prepared remarks and respond to questions received via email and then open the call for questions.

[Operator:]

[Operator Instructions] our first question comes from Trevor Cranston with JMP Securities. Your line is open.

[Trevor Cranston:]

Hi, thanks and congratulations on the great quarter. First question is a follow-up to the commentary on how origination volume was trending 4Q to-date? Can you also comment on what you're seeing in the trend, in the gain on sale margins so far for October, would they move higher on interest rates?

[Todd Taylor:]

Hi Trevor. This is Todd. So, the first question is the trend on origination income? Well, as we talked about, originations were very strong again in the month of October. But as we all know, the seasonality of fourth quarter, we expect that to pull back a little bit for the rest of the quarter. On margins, we had a very good quarter of 268 basis points in top line margins. Again, I would expect with the seasonality that we are going to see some compression of those margins into the fourth quarter.

[Trevor Cranston:]

Okay, got it and then on the non-QM program, can you just give us some color on kind of an update on where that stands currently and sort of the outlook for expected volume over the next couple of quarters?

[Bill Ashmore:]

Yes, we're seeing the volume increasing, in fact, we just recently rolled out our automated underwriting system, IDASL at the NBA a week or so ago and was received very positively. We signed quite a few additional clients and in addition to that, through our re-warehousing [ph], we also saw a number of clients that made application because of the need for liquidity and originating this product. The majority to-date recently is being seen through our broker division, but we expect that to expand. We still are looking towards our goal to originate upwards of $1 billion next year.

[Trevor Cranston:]

Got it. Okay, that's helpful. And then last question, I noticed that there was a change in the valuation of the long-term debt related to the improved financial outlook for the Company. Although it also looks like the deferred tax asset, kind of stayed the same. Is that something that would potentially be re-evaluated kind of as you approach the end of the year, given the improved outlook for the Company at this point? Or how should we think about that going forward?

[Todd Taylor:]

Yes, Trevor, so you're exactly right. We did write-up a long-term debt because of the reasons you spoke. We were able to raise capital and we had strong earnings, etc. We will evaluate the DTA at the end of the year, but most likely as I've spoken to the number of audiences recently that we won't see an increase in the DTA till sometime probably in the second half of 2017, given our strategy of retaining servicing, which is a tax, it's kind of a tax saving plan. So, I wouldn't expect it into fourth quarter. We won't see any increase until 2017, on the DTA.

[Trevor Cranston:]

Okay, that's helpful. Thank you.

[Operator:]

[Operator Instructions] And I'm showing no further questions at this time, I'd like to turn the call back to management for further remarks.

[Justin Moisio:]

Perfect, we have no further remarks. Appreciate everybody's attendance and I hope everybody has a good holiday, thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference.